The NFL is a multi-billion dollar industry – but did you know that it is classified as a charity? The recent economic downturn made the public, and in turn Congress, nationally challenge the NFL and other professional sports associations – namely the NCAA, the NHL, the PGA, and the US Tennis Association – for making money but not paying taxes. Are they getting away with tax evasion, however, as Senators claim? Read here to learn the background of why sports associations have exempt status and whether or not it actually matters much for the rest of America.
Tax law code from a different era protecting sports associations
The NFL is technically a public charity – along with the NHL, the PGA, and the US Tennis Association. These sports associations fall into a loophole in IRS tax code from 1966 that allows trade organizations for major industries (The American Cotton Growers Association for example) to hold a 501 (c)(6) status, which, for all relevant tax purposes, affords them nearly every benefit of public charities.
The code specifically mentions “professional football leagues”, as it was drafted in conjunction with the NFL itself. The NFL needed the loophole to get around anti-trust laws to merge the AFL and NFL for the modern league, and Congress helped.
Sports associations’ revenue
Robert Goodell, NFL Commissioner, claims that the league will make 25 billion by 2027 in annual revenue. While much of that is tied to teams, who generally are for profit businesses that pay taxes (Green Bay is a public company), portions of revenue get kicked back to the NFL Association as “membership fees”.
Those fees pay for office salaries for administrative staff in New York, as well as CEO salaries. Robert Goodell is the fifth highest paid CEO in the nation, with annual compensation of more than $42 million. That salary represents more than 14% of the NFL’s total official revenue. The PGA commissioner Tim Finchem made $5.2 million in 2010, and NHL commissioner Gary Bettman earns around $8 million.
Many of the college football bowl championships are huge revenue makers with nonprofit status under the NCAA as well. The Bowl Championship Series generated $261 million in revenue in 2009, for example. They only gave $4 million to charity.
The ‘Properly Reducing Over Exemptions for Sports Act’
Four senators, led by Republican Tom Coburn have introduced an Act of Congress (The Properly Reducing Over Exemptions for Sports Act) to reverse the nonprofit status. They claim that organizations should not have nonprofit status since they do not provide a public service, and taxation would add $109 million to federal revenue over the next 10 years.
Are sports leagues tax evading?
Not necessarily. The Major League Baseball Association had exemption, but actually chose to relinquish it in 2007 to avoid reporting top salaries and filling out unnecessary paperwork, including the onerous 990 IRS tax return. They claim it was not saving them money to be exempt. The NFL keeps its status most likely to avoid falling into another tax loophole which would make it liable to pay for stadium revenues from an agreement in the past.
The teams still pay taxes, and all employees, including Goodell, have no tax exemptions on their salaries and pay taxes on personal income. Plus the NFL pays taxes on Direct TV revenues and merchandise sales as those funds go through the business side of the league, NFL Ventures. The other sports leagues are similar in structure.
By many calculations, the league actually loses money annually, and wouldn’t pay taxes anyway. Teams make money, but they already pay taxes.
Will the bill succeed?
Most analysts doubt it. Beyond the fact that Washington’s political climate is not open to passing much new legislation, the NFL has spent $1.6 million in lobbying Congress and donated millions to campaigns. The senators themselves claim they just want to see some sort of action taken by the leagues themselves.
Sports associations having nonprofit status is a bit despicable, especially when factored that they have it because they were evading national laws in the first place, but it probably does not matter much to the bottom line of tax revenues. It might have actually helped over the years develop the multibillion dollar industries that help support some of the greatest US cities.